Chongqing Zhifei Biological Products (SZSE:300122) has had a rough month with its share price down 15%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Chongqing Zhifei Biological Products' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Chongqing Zhifei Biological Products

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Chongqing Zhifei Biological Products is:

28% = CN¥8.5b ÷ CN¥30b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.28 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Chongqing Zhifei Biological Products' Earnings Growth And 28% ROE

First thing first, we like that Chongqing Zhifei Biological Products has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 6.6% which is quite remarkable. Under the circumstances, Chongqing Zhifei Biological Products' considerable five year net income growth of 37% was to be expected.

As a next step, we compared Chongqing Zhifei Biological Products' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 11%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Chongqing Zhifei Biological Products fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Chongqing Zhifei Biological Products Using Its Retained Earnings Effectively?

Chongqing Zhifei Biological Products has a really low three-year median payout ratio of 11%, meaning that it has the remaining 89% left over to reinvest into its business. So it looks like Chongqing Zhifei Biological Products is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Chongqing Zhifei Biological Products is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 11%. As a result, Chongqing Zhifei Biological Products' ROE is not expected to change by much either, which we inferred from the analyst estimate of 23% for future ROE.

Summary

On the whole, we feel that Chongqing Zhifei Biological Products' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.